The one thing that kills more businesses in their first 5 years than anything else is lack of cash. Not so much the profitability of the business, or how much money is ‘made’. Its cash flow.
Lack of cash leads to you not paying yourself, or late paying your suppliers, both fast ways to administration. Lack of paying yourself causes you to resent the business, the very thing you set out with to help you achieve your dream in the first place!
And poor supplier relationships from not paying on time, or borrowing from Peter to pay Paul, gives you a rubbish reputation and has you in the sights of the county court and all sorts of other nastiness.
All this battling wears you down eventually, and if you don’t have your mind made up for you by an insistent creditor or the bank, you are more than likely to jack it all in and get yourself a job. The dreams of a work life balance and more money or shattered and you humbly return to the life of the drone and the 9-5, which you swore you would never do again.
There is another way! Running a healthy business is just like running a healthy body. The rules of nutrition give us some great advice when it comes to keeping our businesses healthy too.
- Small Plates. Reducing plate size reduces portion size. Portion control is one of the main factors linked to a healthy and fit body
- Eat your greens first. If you concentrate on the stuff that makes you well, you’ve less appetite for the stuff that makes you sick and fat
- Remove temptation! Get all of the sweets and desserts out of the house, giving yourself a chance to stick to your new lifestyle choices.
- Enforce a rhythm. Eat little and often and avoid skipping meals all day and then diving into a takeaway last thing at night, because that’s all you’ve had time for.
Good advice, right? We all know this stuff by now, even if we don’t really practice it too much ourselves, it’s pretty much programmed in.
The reason this can be such a powerful system is that it works with our behaviours not against them. This encourages us to stick to it as it feels an easy and natural thing to do. The alternative fads and trends come and go, and as soon as we get out of whack, or find ourselves under pressure, we resort to our default behaviours.
What’s all this got to do with running a profitable start up?
It’s simple, following these behavioural ‘guard rails’ will allow you to set up and manage an effective finance and cash strategy. Cash is the lifeblood of your business, without it you may as well give up. Or be forced to give up as we said earlier!
What I’m going to tell you to do is simple – but like a lot of other things it’s really hard to stick to. And unless you stick to it, it doesn’t work. Having the guard rails to keep you on track, as well as something called an accountability partner maybe, is a great way to give the plan its best chance to succeed.
Here’s what you do. Day one, or even before you start, open up 5 foundation accounts at the bank.
One for Income, one for your Profit, one for your Owners Pay, one for Tax and one for your Operational Expenses. You might want a few others as you become more advanced, like a VAT account, or a Materials and Sub Contractors account, but we can talk about that another time.
Now either work out your current percentage allocation of your income into these areas or use a benchmark. If you are a micro business for instance, you’ll want to aim for a 5% Profit allocation, a 50% Owners Pay allocation, put aside 15% for Tax, and allow yourself 30% in Operations Expenses. Makes sense?
By the way – Its vital that you work on the real revenue your company generates. This is your top line turnover, minus any cost for materials and subcontractors that goes straight out of the business. You might be a million-pound company, but if you are spending £400K on materials and subs, you’re a £600K company.
Here’s that nutrition plan again, but this time in business terms.
- Small plates – When money comes into the Income account, its acts as the platter, instead of the sole repository of your cash. You serve small amounts off to each account to serve a specific purpose.
- Serve sequentially – The Primacy effect. By dealing with your Profit First you are concentrating on the most important part of your business. Its profitability. By setting percentages you are immediately making your budget real and giving yourself the chance to achieve it.
- Remove temptation. Those Profit and Tax accounts? They are there to serve you. A. To provide you with a quarterly disbursement to celebrate your brilliantly profitable enterprise, and B. to make sure your business also covers your tax liability. No more finding a few thousand pounds at the end of every year.
- Enforce a rhythm. Undertaking your allocations on the 10th and 25th of every month soon establishes a habit and a flow. A habit makes it easier for you to stick to this, and the flow lets you spot problems a long way off as soon as you sense there is a disturbance in there.
And that accountability partner? That’s someone who is in on the plan, someone who knows the percentages you want to get to and knows the reason you’re doing all this in first place and holds you accountable to it. Don’t make it someone too close, or someone with a vested interest. A Profit First professional is the ideal partner, but in reality, anyone can do it.
If all this sounds a bit complicated just take one step towards profit now. Open one more account at the bank as well as your business account. Call it your profit account. And the next time you receive a payment for your goods or services, take 1% and put it away in the Profit account.
Like magic, you are profitable! Even on day 1.